EU financial transaction tax seen costing Britain $6 billion

Study funded by City of London Corp.

The European Union’s planned tax on financial transactions could add 3.95 billion pounds ($6 billion) to the cost of issuing U.K. government debt, according to a report commissioned by the City of London Corporation.

Investors would demand an extra yield for purchasing the bonds as the tax increases the cost to them of trading the securities, London Economics, which conducted the study for the city, said today. The expense would have arisen even though Britain hasn’t signed up to the proposal.

“The financial transactions tax is an ill-conceived idea that risks significantly damaging economic prospects across Europe,” Mark Boleat, policy chairman at the corporation, the financial district’s municipal government, said in a statement. “Not only would it adversely affect the cost of sovereign debt but it would also make it more difficult for businesses across the continent to access funding.”

The European Union on Feb. 14 unveiled its proposal for a 0.1 percent levy on stock and bond trades and 0.01 percent on derivatives trades with ties to participating countries. The measure exempts primary offerings of government bonds though includes secondary market trades. The EU estimates the move could raise as much as 35 billion euros ($45 billion) a year. To become law, the proposal has to be approved by all the nations that agree to participate, which currently stands at 11 countries including Germany, Spain and France.

The effective tax rate would be 10 times the EU levy on bonds because the tax would be repeatedly charged at each step in the settlement of a trade, the report said. That “cascade effect” could cripple trading in the debt-securities markets, London Economics said.

The estimate is based on the issuance of about 128.1 billion pounds of non-index linked U.K. gilts had the levy been in place this year, the 30 percent of transactions liable for tax and the number of times a bond is traded, the report said.

To stop traders from escaping the levy by operating outside the tax’s zone, the EU plan invokes “residence” and “issuance” ties to firms in participating nations. That means, for example, that a French bond traded in London would still be affected.

“The financial transaction tax is likely to negatively affect end users such as pension funds, while generating less revenue than estimated due to the behavioral change that would result,” Boleat said. “Policy makers need to reconsider this proposal.”

About half of European investment-banking activity is conducted through London and U.K. financial firms generated almost 12 percent of the country’s tax revenue from 2011 to 2012, according to TheCityUK, a bank lobbying group started by the corporation.